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Friday, 21 April 2017

#PSD2: The FCA Clarifies The "Business Test"

In deciding whether or not a firm's activities are caught by the new Payment Services Directive (PSD2) as implemented in the UK by new Payment Services Regulations, one needs to first consider whether the activities are conducted by way of business. This is a question of fact and degree that can be difficult to answer. In the consultation on its approach to supervising the new regulations, the Financial Conduct Authority has helpfully done a lot more than it has in other areas to clarify when it considers that a payment activity will constitute 'a regular occupation or business' in itself, as opposed to being merely part of another type of business.

“…Simply because you provide payment services as part of your business does not mean that you require authorisation or registration. You have to be providing payment services, themselves, as a regular occupation or business to fall within the scope of the regulations. Accordingly, we would not generally expect solicitors or broker dealers, for example, to be providing payment services for the purpose of the regulations merely through operating their client accounts in connection with their main professional activities.”

The FCA has revised Question 9 as part of its proposed draft changes to the Perimeter Guidance to read as follows:

"Q9. If we provide payment services to our clients, will we always require
authorisation or registration under the regulations?

Not necessarily; you will only be providing payment services, for the purpose of the
regulations, when you carry on one or more of the activities in PERG 15 Annex 2:

as a regular occupation or business activity; and

these are not excluded or exempt activities.

Simply because you provide payment services as part of your business does not mean that
you require authorisation or registration. You have to be providing payment services,
themselves, as a regular occupation or business to fall within the scope of the regulations
(see definition of "payment services" in regulation 2(1)). In our view this means that the
services must be provided as a regular occupation or business activity in their own right
and not merely as ancillary to another business activity. Accordingly, we would not
generally expect the following to be providing payment services as a regular occupation or
business activity:

solicitors or broker dealers, merely through operating their client accounts in
connection with their main professional activities;

letting agents, handling tenants’ deposits or rent payments in connection with the
letting of a property by them;

debt management companies, receiving funds from and making repayments for a
customer as part of a debt management plan being administered for that customer;
and

operators of loan or investment based crowd funding platforms transferring funds
between participants as part of that activity.

The fact that a service is provided as part of a package with other services does not,
however, necessarily make it ancillary to those services – the question is whether that
service is, on the facts, itself carried on as a regular occupation or business activity."

Simlarly, in Question 38, the FCA proposes to state:

"Q38. We are an investment firm providing investment services to our clients - are
payment transactions relating to these services caught by the regulations?

Generally, no. Where payment transactions only arise in connection with your the main
activity of providing investment services, in our view it is unlikely that you will be
providing payment services by way of business. In those limited cases where you are, the PSRs 2017 do not apply to securities assets servicing, including dividends,
income or other distributions and redemption or sale (see PERG 15 Annex 3, paragraph
(i))."

In relation to e-commerce marketplaces, the FCA proposes to add the following question to its Perimeter Guidance:

"Q33A. We are an e-commerce platform that collects payments from buyers of goods
and services and then remits the funds to the merchants who sell goods and
services through us – do the regulations apply to us?

The platform should consider whether they fall within the exclusion at PERG 15 Annex 3,
paragraph (b). The PSRs 2017 do not apply to payment transactions from the payer to the
payee through a commercial agent authorised via an agreement to negotiate or conclude the
sale or purchase of goods or services on behalf of either the payer or the payee but not both
the payer and the payee.

Recital 11 of PSD2 makes clear that some e-commerce platforms are intended to be within
the scope of regulation. An example of where a platform will be acting for both the payer
and the payee would be where the platform allows a payer to transfer funds into an account
that it controls or manages, but this does not constitute settlement of the payer’s debt to the
payee, and then the platform transfers corresponding amounts to the payee, pursuant to an
agreement with the payee.

The platform should also consider whether they are offering payment services as a regular
occupation or business activity (see Q9). Depending on your business model, the payment
service may be ancillary to another business activity, or may be a business activity in its
own right. Where the payment service is carried on as a regular occupation or business
activity, and none of the exclusions apply, the platform will need to be authorised or
registered."

The FCA also proposes to add Question 34A relating to "online fundraising platforms":

"Q34A. We are an online fundraising platform which collects donations in the form
of electronic payments and transmits funds electronically to the causes and
charities that have an agreement with us - do any of the exclusions apply to
us?

Persons collecting cash on behalf of a charity and then transferring the cash to the charity
electronically do not fall within the exclusion in PERG 15 Annex 3, paragraph (d), unless
they themselves are carrying this out non-professionally and as part of a not-for-profit or
charitable activity. For example, a group of volunteers that organises regular fundraising
events to collect money for charities would fall within this exclusion. On the other hand, an
online fundraising platform that derives an income stream from charging charities a
percentage of the money raised for them is unlikely to fall within this exclusion.

Nor will an online fundraising platform accepting donations and then transmitting them to
the intended recipient be able to take advantage of the exclusion in paragraph (b), as they
are not a commercial agent authorised via an agreement to negotiate or conclude the sale or
purchase of goods or services on behalf of either the payer or the payee but not both the
payer and the payee.

Online fundraising platforms should also consider the guidance in Q33A."

There may be some confusion over whether a platform is an "online fundraising platform" covered by Questions 33A and 34A, as opposed to a 'donation/reward based crowdfunding platform' which I would suggest should be treated consistently with loan/investment based crowdfunding platforms under Question 9 above.